unit 4 – good debt, bad debt: using credit wisely
TRANSCRIPT
Credit
Unit 4 – Good Debt, Bad Debt: Using Credit Wisely
Credit Card Statistics
176.8 million credit cardholders in 2008 The average credit cardholder has 3.5 credit
cards The average American has nearly $10,700 in
credit-card debt The average age at which a U.S. consumer under
the age of 35 first adopted a credit card is 20.8 years
80% of consumers currently own a debit card
Number of Credit Cards in U.S. ~ 2009
Provider Credit Debit
Visa 270M 382M
MasterCard 203M 125M
American Express
48.9M n/a
Discover 54.4M n/a
Credit Card Statistics ~ Students
84% of the student population overall have credit cards
Only 2% of undergraduates had no credit history
50% of undergraduates had 4 or more credit cards in 2008
76% of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. Additionally, they will amass almost $20,000 in student debt
41% of undergrads have a credit card. Of the students with cards, about 65% pay their bills in full every month, which is higher than the general adult population
What is credit?
A loan
Paid off with interest
That allows you to buy an item now but pay for it over a period of time
Types of CreditType of Credit
Features
Credit Card Some cards can be used anywhere (Visa); others only at a specific place (Gap)
No payoff deadline
Monthly minimum payments vary based on the balance
Usually has the highest rate
Installment Loan
Typically used for large purchases such as a car
Loan term can vary from a few months to many years
Monthly payment amounts are often set for the life of the loan
Usually has a lower interest rate then a credit card
Student Loan Used for tuition and other college expenses
Some programs let you delay payments until you graduate
Loan term is usually up to 10 years
May provide an income tax break
Mortgage Usually repaid over 15-30 years
Monthly payments are set for the life of the loan
Usually has a lower interest rate than an installment loan
May provide an income tax break
Costs of Using Credit
Annual Percentage Rate (APR) – annual interest rate
Annual Fee – yearly charge you pay for the privilege of using credit
Credit Limit – maximum amount of credit a lender will extend to a customer
Finance Charge – actual dollar cost of using credit to maintain a balance
Origination Fee – charge for setting up the loan (usually seen with home loans)
Over the Limit Fee – fee for spending more than your credit limit
Late Fee – penalty for making a payment after the due date
Pros and Cons of Credit
PROS
Convenience Protection Emergencies Opportunity to Build
Credit Immediate
Gratification Special Offers Bonuses
CONS
Interest Overspending Debt Identity Theft
Are you Credit Worthy?
The Four Cs of Credit Collateral▪ What lenders can take from you if you don’t repay
Capital▪ Your net worth
Capacity▪ Income and employment history; ability to pay back
the loan▪ Debt:income ratio
Character▪ Are you trustworthy?▪ Look at your credit history
How to Build a Good Credit History
Pay your bills on time Make regular deposits in your
savings account Be choosy about your credit cards
and loans; only use the ones you need and keep them for a long time
Better to maintain a low balance and pay if off each month than to have no balance at all
What’s Considered Good Credit? Credit Scores prepared by 3 Credit
Reporting Agencies in the US Equifax Experian TransUnion
Credit Score Description
730-850 Excellent
700-729 Great
670-699 Good
585-669 Average
300-584 Bad
FICO score is calculated statistically, with information from a consumer's credit files. The letters stand for Fair Isaac Corporation
What Determines Credit Score?
What Hurts your Credit Score?
Late Payments Bouncing Checks Having Multiple Credit Cards and Loans Maintaining high balances on your
cards Changing credit cards frequently
Stays on your credit report for 7 years!!!!
Why do you need good credit?
Shelter Mortgage▪ Bad credit = higher interest rate or denial
Rent▪ Bad credit = denied lease
Transportation Unless you have cash to pay for car, you’ll need to get a loan Good credit = larger loan amount and better interest rates
Employment Background checks look at financial responsibility
Entrepreneurship Small Business Loans
Utilities Cable, telephone, water, even cell phones
Credit Score
64% of American adults have not ordered a copy of their credit report in the past year; this grows to (72%) among Hispanic Americans
37% of American adults admit that they do not know their credit score
Corpus Christi, Texas, residents have America's worst credit scores
How do you get your credit score? Contact the 3 credit reporting agencies and
request it! Entitled to a free credit score each year (report
costs $15)
How it can get out of hand
Overspending Spending more than you make
Personal Issues Divorce Medical
Professional Issues Business failure Slowdown/Riding out the Storm
Personal Stories
Jana, 45, college degree, married, 1 child (8)
Director of Purchasing at Ford Motor Company
Earns over $100K/year Lived in the same home for 10 years Daughter in private school Drives nicest cars, wears fashionable
clothes, vacations twice a year
Personal Stories
Husband owned family business in automotive after-market Business historically did well bringing in $250K+; spending habits
reflected that When auto industry went into recession, so did after-market Business slowed, but kept expecting it to rebound Continued to spend money on business, trying to bring in new clients ~
for 5 years Husband’s credit destroyed, put business in wife’s name Bills continued to pile in, but no new revenue from family business Owe $50K to IRS in back taxes Took out a 2nd mortgage to pay off growing debt Husband’s substance abuse explodes Housing market tanked, now owe more on house than it’s worth Daughter still in private school, still buying fabulous boots/jewelry; still
going to Vegas staying in luxury suites Stress of financial worries caused marital problems; filed for divorce Minimum payment on credit cards greater than Jana’s high paying job at
Ford Hasn’t made a house payment in over a year (playing odds with bank
due to high number of foreclosures in Detroit) Continues to pay utilities otherwise won’t have power or heat…
The Dark Cloud of Debt
Jana owes more than $100,000 Paying the monthly minimum of
$1501 at 18% interest, it would take her 38 years to pay it off Note: paying less than $1500 per month
would never pay off the balance assumes she pays cash for all future
purchases and incurs no further charges
What can she do?
Put away the plastic, and stop adding to her debt
Start living entirely on a cash basis again
Make a personal commitment to repay all her debts Start by either paying off the card with smallest amount
– or – the one with the highest interest
Find out exactly how bad it is – how much does she really owe?
Create a repayment plan that she can stick withhttp://money.cnn.com/video/pf/2012/03/30/pf-hd-100K_debt.cnnmoney/
If that doesn’t work
Bankruptcy – a legal process to get out of debt when you can no longer make all your required payments
Chapter 7▪ Allows you to erase most of your debt▪ To qualify, you typically must be unemployed or have a very
low income▪ Must undergo financial counseling
Chapter 13▪ Allows you to repay many of your debts over a period of time▪ Court typically oversees to make sure you do it
Bankruptcy
Still have to pay student loans, child support, alimony, and any penalties and fines for crimes
Stays on your credit record for 10 years Have to rebuild credit starting at approx.
400 Makes it difficult to get new credit cards,
buy a house, rent an apartment, etc.▪ when Jana finally loses her house, her parents
will have to buy a condo for her and her daughter to live in…▪ What would happen if her parents couldn’t bail
her out?!?